Freight factoring is one of the most readily utilized methods of financing in the logistics industry. Though popular, every business is unique: what works for one trucking company may not be the best option for yours.
How do you know if freight factoring is the right financing method for you? This blog is a great place to start! In the content below, we define freight factoring, answer financing method FAQs, and examine a few of the most compared financing methods.
What is Freight Factoring?
Freight factoring serves as a strategic collaboration between a factor and a trucking company, addressing the challenge of unpaid accounts receivables. When a trucking company faces outstanding invoices, the factor steps in, acquiring these receivables at a discounted rate. This prompt transaction injects much-needed cash directly into the hands of the trucking company.
The process is straightforward: the trucking company’s client fulfills the invoice, the freight factoring company is reimbursed in full. This relationship ensures that the wheels keep turning smoothly, with the trucking business enjoying a continuous cash flow.
The appeal of freight factoring is its flexibility and ability to meet various financial needs of trucking companies. Whether it’s seizing business opportunities, covering daily repairs and vehicle maintenance, managing payroll, or even fuel expenses, freight factoring proves to be a versatile solution.
The two primary methods of freight factoring are: recourse and nonrecourse factoring. These avenues offer trucking companies flexibility in choosing the model that aligns with their specific requirements. Whether opting for the added flexibility of recourse or the risk mitigation provided by nonrecourse factoring, trucking businesses can tailor their approach to suit their financial objectives.
In essence, freight factoring emerges as a dynamic financial strategy, ensuring a steady and increased cash flow for trucking companies. It’s not just a transaction; it’s a partnership that propels the trucking industry forward, providing the financial stability needed for growth and operational resilience.
How Does Freight Factoring Work?
A key benefit to freight factoring getting paid quickly, providing a boost for trucking businesses. The way this works is, trucking companies submit invoices for same-day processing, ensuring a steady cash flow to keep operations running smoothly.
This collaboration benefits everyone involved. Trucking companies enjoy speedy payments, avoiding the usual delays of traditional invoicing. Factoring companies make money by charging a percentage during the invoice purchase, which they earn when collecting from the customer. Customers can trust dealing with financially secure partners in the industry.
Here’s a quick overview of the process:
Application and Agreement:
• Trucking companies start by submitting an application. Once approved, a detailed factoring agreement is set up, covering rates and fees.
Load Booking and Submission:
• With approval, the trucking company books a load and submits essential documents, including a bill of lading and rate sheet, to the factoring company.
Advance and Payment Terms:
• The factoring company advances the invoice amount, deducting a predetermined fee based on agreed-upon payment terms.
Payment by Broker or Shipper:
• The final step involves the freight broker or shipper making payment to the factoring company within 30 to 90 days.
As part of the process, credit checks on clients help reduce risks, aiding trucking companies in choosing reliable partners. The choice between recourse and non-recourse factoring agreements adds flexibility, allowing businesses to tailor their approach based on specific needs.
In essence, freight factoring offers a straightforward solution for trucking businesses seeking immediate payments and financial stability.
Recourse Factoring
As the name implies, recourse factoring involves recourse. Recourse factoring companies require collateral. If a customer does not fulfill the invoice, the trucking company is then held responsible for repaying the purchased account receivable.
To help minimize risk, most recourse factoring companies only accept trucking companies with creditworthy clients. Even so, sometimes customers fail to pay completely, positioning the trucking company with the same cash flow concerns as before.
Why would a trucking company choose recourse freight factoring? Though recourse factoring is riskier than nonrecourse, companies with enough capital to repay for an unfulfilled accounts receivable may choose this option, because recourse factoring rates are often lower. However, not all trucking companies have the capital to take the risk.
Nonrecourse Factoring
Nonrecourse factoring does not involve recourse, therefore dropping the collateral requirement. Although the factoring rate is sometimes higher than recourse, the factoring company assumes all the risk of purchasing the account receivable. If a customer fails to pay their invoice, the factor absorbs the bad debt.
Small to-mid sized trucking companies often utilize nonrecourse factoring because of the security involved.
Freight Factoring FAQ
As a nonrecourse factoring company, we readily receive questions about freight factoring. Hopefully, we will address any concerns or questions you may have.
Who is Responsible if My Customers Don’t Pay?
As mentioned, this depends on the method of freight factoring. Recourse factoring places responsibility for unpaying customers in the hands of the trucking company, while nonrecourse factoring places responsibility on the factor.
At Advanced Commercial Capital, we have a nonrecourse program where we assume all risk on purchased invoices.
What is the Difference Between Factoring and Securitization?
Although there are multiple differences between factoring and securitization, the primary involves the number of individuals purchasing the receivables. Factoring involves a sale to a single factor, while securitization often includes multiple investors.
Who Receives the Payments From My Customers?
Once the factoring company purchases an invoice, the customer will pay the factor directly. Payments accidentally given to the trucking company should be immediately forwarded to the factor.
How Long Do I Have to Factor?
Although we cannot speak for all factoring companies, we strive for flexibility at Advanced Commercial Capital. Thus, our customers are not obligated to factor for a specific length of time, and there are no maximum or minimum number of invoices or dollar volumes needed to qualify for our factoring program.
How Quickly After Submitting an Invoice Can I Get Paid?
Once the invoice and all supporting documents have been received, the trucking company receives payment within one business day. In certain circumstances, quicker payment can be provided.
Freight Factoring vs Traditional Bank Loan
For some companies, a traditional bank loan may be a better financing method. However, we often encourage trucking companies in need of immediate cash flow to pursue freight factoring.
Consider these three elements:
• Firstly, bank loans can be challenging to acquire. Factoring companies consider the creditworthiness of a trucking company’s clients, while banks consider the creditworthiness of the trucking company itself. Thus, if a trucking company has bad credit, it will have a difficult (if not impossible) time pursuing a loan.
• Secondly, bank loans take time to receive. When a trucking company needs cash fast, factoring provides cash flow within a matter of days – sometimes sooner. The process of applying for and receiving a bank loan is much longer.
• Finally, factoring is flexible. Choose a trustworthy transporting company with no minimum volume requirements or long-term contracts. Your business can benefit from the financing as needed… and only as needed. Factoring offers a sense of financial freedom and flexibility that traditional bank loans cannot.
Advanced Commercial Capital: Trustworthy Freight Factoring
Still, have questions about freight factoring? Our team at Advanced Commercial Capital is ready to respond!
We provide cash flow for trucking companies with zero unpleasant surprises. Additionally, our program involves numerous benefits – from a free fuel discount card program to free credit checks – designed to help you be successful at your job while saving time and money.
Interested in pursuing freight factoring for your company? Give us a call at 855-465-4655 or complete our online contact form! A specialist will respond shortly.